|Dealer frustration levels seem to be heating up with the weather due to the funding practices of their Special Finance (SF) department or, perhaps more appropriately, the lack thereof. After investing in the training and development of their teams in the first quarter, their SF sales had indeed ramped up, nearly tripled from their previous levels. Now, a new (and common) issue has reared its head – a logjam with their contracts in transit (CIT).|
The most important of my eight essential elements of SF is commitment towards SF efforts – from the top, all the way throughout the organization. Nothing undermines commitment like a bundle of unfunded contracts. Dealers and general managers who suddenly see an additional $200,000, $300,000, even $500,000 tied up in CIT get very irritable very quickly. Things always roll downhill, and it doesn’t take long for that emotion to arrive at the desk of the SF manager.
Questions posed to me ranged from “How long should it take to get my deals funded?” to, “What can we do to speed this process up?”
First, define what your goals will be. The average funding time for SF deals, starting from the time the vehicle crosses the curb until the collected funds are available in your checking account, is 14 days. That means if your department is selling 30 units per month with an average contract size of $16,000, you likely have 15 contracts totaling $240,000 awaiting funding at any time. That is not insignificant. Especially if before ramping up the department, you normally only had four to five outstanding, meaning less than $80,000 of frozen capital.
The target should be seven days, and here is why it isn’t any faster than that. Keep in mind we’re looking at the typical best case scenario deal.
Day 1- Monday – Deal is spot delivered because delivery is too late in the day for approval, or documents are missing. The clock starts ticking.
Day 2-Tuesday – Deal is approved, packaged and shipped overnight to finance company.
Day 3-Wednesday – Deal arrives at finance company and delivered to funder’s desk after lunch. The best funders will generally need 24 hours to complete verifications and auditing.
Day 4-Thursday – Verifications and auditing are complete and notice is sent to you that the deal is funded. The EFT process begins.
Day 5-Friday – A memo is posted on your bank account indicating an incoming ACH.
Day 7-Monday – Collected funds are finally deposited in your account and available to spend.
Why is all of this important to know? Prime credit contracts which are generally drafted on immediately, eliminate most CIT issues. Dealers or general manger who are not used to the intricacies of SF often expect the same type of timeline for SF contracts and prime contracts. Generally, that is not a reasonable expectation.
However, seven-day funding is indeed possible and reasonable for SF contracts. . If it is attained, you will shave a week off the average funding time, achieving the industry’s benchmark. Doing so should add seven days worth of cash flow back into the system, which will most certainly improve the temperament of the dealer and general manager.
Fast funding must be the culture of the dealership. For some dealers, that means a significant change of policy. One suggestion is implementing the “three-six-ten rule.” According to this rule, deals must be approved within three days of contracting (this allows for weekends), and all documents have to be in the store within six days of contracting. Finally, a funding fax is a must within ten days. If any of those points on the timeline are missed, the deal gets unwound, or upper management has to approve an exception. Exceptions must be watched closely so they did not become the norm. Without timelines, I have witnessed some stores with unfunded deals on the street for 60, 90, 120 and even 155 days! There is simply no excuse for that.
So, what are some of the obstacles to fast funding, and what are some of the best practices used by dealers that have the system down to an art?
First and foremost, in order to fund a deal, it must be approved. Quite often, managers are overaggressive, throwing it all at the wall to see what sticks, which often results in unwinding or re-signing customers. It is not abnormal to have four to seven percent of your deals result in re-signing. Certainly, you should strive to avoid the practice, but in a high volume store in a competitive market, most would not consider that reckless. Should that number become 12 to 15 percent, most likely the SF manager is making poor decisions on deal structure or on which finance company to use, or both. Keep in mind that for every re-sign that takes place (in the states allowed), the chance exists that the deal will blow up.
Another obstacle is missing documents at the time of sale. It is commonplace for documents to be missing. What is amazing is how quickly a customer loses the urgency to provide the necessary paperwork after they are driving their new vehicle. Successful managers and funding assistants know where to draw the line. Many managers make the decision to deliver the vehicle without proof of income, employment or residence. If you are unable to get employment and income proof at the time of sale, you are playing Russian roulette. Sooner or later, the wrong chamber will advance. If you are lucky, it will simply cause you to change finance companies. If not, you had better hope that Tom Hudson (our legal expert) and his crew have reviewed your spot delivery agreement and deal documents.
When delivering a vehicle without documents, many successful dealers provide customers with a checklist of missing documentation along with a pre-addressed envelope and/or fax number so they can be easily returned. Additionally, they will point out language in the Purchase Order or have the customer sign an acknowledgement that the deal is conditional on the documents being returned within 24 or 48 hours. In either case, the finance manager signing the deal must stress the urgency and importance of prompt action.
Often, missing documents are the result of not realizing something is missing at the time of delivery. My dealerships used a four page form for the F&I manager. It included on one page the “funding checklist from hell.” It essentially guaranteed that if you had all the documentation on the checklist, the deal would fund. The other pages of the form addressed the other types of transactions. It also had a page designed to assist the title clerk – how the vehicle was to be titled along with all the necessary documents, again depending on which state was involved.
When packaging the deals, we used the funding checklist provided by the company whose paper the deal had been contracted on. All documents were numbered, then photocopied. The funding package was always stacked neatly in the specific order assigned on the checklist and essentially made to look like a mortgage funding package. A deal that is neatly packaged in the order the funder is familiar with makes for a happier funder and an expediently funded deal.
One of the best practices to utilize is a daily Save-A-Deal meeting. This meeting involves the SF manager and an assortment of people like general managers, sales managers, office managers and funding assistants. Each deal that has been contracted and not funded has its status reviewed and an action plan for it established. The goal is to ensure that no deal reaches the three-six-ten threshold and becomes an “unwind.” You would be surprised at how effective these meetings can be, all while keeping upper-level management comfortable with the level of focus on their CIT inventory.
While on the topic of funding assistants, they can be a valuable addition to higher volume stores. They actually break down the deals, recheck the numbers, ensure all the required documents are with the deal, then package and forward them to the finance companies. They generally work the deal all the way through funding. The funding assistants are also the watchdog. They will call to verify employment, income and residence. They essentially perform the job that the finance company’s funder will do. If they find something that would become a deal-breaker, it is immediately sent back to the finance office for them to attempt to rectify. Again, this saves days in the process.
Two other things can greatly improve funding times. Assuming your documents have been neatly packaged and accurately submitted for funding, place calls to the funder daily. Check the status of every deal with every company, every day. Do not rely on DealerTrack or Web sites. Mistakes happen on both sides. It is not unthinkable that a deal contracted with CapitalOne, for example, to be errantly put in the overnight package to AmeriCredit. It is also not unheard of for a finance company to lose your funding package after they have signed for it. Being proactive, as opposed to reactive, will often save you many days in funding, regardless of which side of the fence the mistake occurs.
Finally, never underestimate the value of your relationship with a funder. Get to know them. Kindness goes a long way. Their job is one of pressure from both sides – the dealer and their own company – and they spend their day in a cubicle with deals piled around them. Thank them, and make it easy for them to want to grab your deal ahead of the others that were dropped on their desk that day. An occasional surprise pizza or tin of cookies can go along way toward helping them remember you over the scores of other dealerships they also work with.
In summary, fast funding is about establishing a culture in your SF department. From there, put simple systems in place that promote efficiency and consistently work those systems. Then, monitor your performance daily while making corrections as needed. Before long, you will have cut seven days out of your funding cycle, making smiles appear all around!
Until next month,
Vol 3, Issue 7
Auto retail veteran and F&I products expert Paul McCarthy has joined AUL Corp. as vice president of national sales.